bellard (98.12)

Available consumer dollars, and the flintstones

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Available consumer dollars - ACD, is a measure of discretionary consumer spending.There are many moving parts, but almost all of these variables are moving in a negative direction when it comes to consumer spending, and more importantly, consumer discretionary spending. We will be analyzing the typical US family, the Flintstones.

I will be focusing on available consumer dollars - ACD. Lower take home wages, plus the increases in all household expenses will cause a large fall in ACD over the next 12-24 months IMHO. Here are some of the variables that will effect ACD.

Income - take home pay:

Negative real wages for the past 8 years. Consecutive job losses 4 months in a row. The continued future federal budget deficit. Much higher health care cost that employers need to pay. And by the way, we are in a recession.

And Fred keeps dropping chunks of rocks on his feet. Mr Slate's medical bills are killing the quarries profits! All these factors will lower one take home W-2 pay. I estimate about a 10% reduction. Also the 40% increase in diesel, has cut the quarries profit in half. Mr. slate will have to reduce wages to stay competitive.

Home equity financing:This is another important factor for the past 5-7 years. As home prices skyrocketed, homeowners all over the US, tapped into these large equity increases, by taking out 50-70K home equity loans at historically low interest rates. This is completely gone. Even worst, the Flintstones now have to really start paying back + interest on their HELOC's. A new stylish wardrobe for Wilma in not in the cards for 2008!

Today housing numbers are very grim, and accelerating to the downside. Existing home prices are falling at rates not seen since the great depression. Also the credit/financial system is broken, with credit being pulled from the best credits. Many oil and gas firms are having their revolvers pulled! - with record oil prices!

Energy prices:

This has direct impact, and of course secondary impacts. Coal, Oil, and gas prices have doubled in a year. NG prices are still a deal only up 50%. I just received my notice of a 25% increase from my electric utility in Durango, CO. This utility uses NG, which has gone up the least.

The town of Bedrock has it even worst. Not being a forward thinking town, more like a stone age town, This town uses heating oil for its power generation. Bedrock is thinking about building a pulverizing coal power plant, but with the 100% increase in coal prices over the past 2 years, this does not help much. Fred and Wilma can expect a 25% increase in utilities in 2008, and 40% increase in auto fuel(Nike sneakers?).

Everyone in the US will start to get 20-40% increases in utility bills over the next 12-24 months IMHO. There is a lag, most utilities that use coal, signed long term contracts for coal, so as coal has doubled, many utilities still pay low prices. The contracts are now expiring or about to expire. These utilities are trying to get new long term coal contracts - but they cant.

The coal demand from China is huge - and china pays higher spot prices. New coal contracts will cost 100% more than those signed just 3 years ago.

We all know that auto Gas is eating into ACD, but these new electric bills will have the double whammy really reducing ACD. The triple whammy hit consumers as all products consumer buy will go up as all US businesses must pass these new higher electric rates to consumers.

Food and clothing

After the US backed subsidy for corn based ethanol, the town of Bedrock saw a great opportunity for balancing its budget. The town worked with all the wheat, and soybean farmers and convinced them to just grow corn, then sell it to the refiners to help reduce our dependence on oil, and get that nice fat subsidy!

But now Bedrock is seeing that the energy needed to fertilize, water, grow, harvest, then distribute the Corn, is more than the energy content of the resulting ethanol - ouch!. Now bedrock has a bigger problem, There is not enough food to feed it citizens. Bedrock is thinking of Fred and others to go on a diet, but this plan has not been well received. So Bedrock has contracted with Mexico, and China to import food into town, but this means paying over 20% more than before.

Here is the Flintstones monthly income statement, and the income statement in one year:

Category Current monthly Change Future amounts

Take home W-2 wage $4,000 ($400) $3,600

Home equity infusions $750 ($900) ($150)

Total take home cash $4,750 $3,450

Auto loan expense $500 $0 $500

Utilities $300 $100 $400

Auto expenses $500 $150 $650

Food $1,300 $200 $1,500

Misc expenses $500 $100 $600

Total expenses $3,100 $3,650

ACD $1,650 ($200)

I have advised that the Flintstones need to change, unless they want to go bankrupt. First Fred needs to change out those granite wheels on his rig. I was thinking maybe pumice or limestone since they don't weight as much.

Another grim change may be in store for Dino - he does consume a lot of food. I have heard if grilled properly, dinosaur takes just like chicken. I have also advised the Flintstone's not to eat out, and no more new clothing, until economic conditions improve!

Back to the rest of the US. I will continue to underweight consumer discretionary. I am bearish on restaurants, higher end supermarkets, and any clothing firms. These firms will have a difficult future spending environment for up to 3 years IMHO.

I also visited the quarry yesterday. There is some good news. Mr slate used to have to compete with aggregates from Mexico, but with diesel prices so high, These foreign firms can't afford to move the very heavy product into the Bedrock market, allowing MR. slate to pass on his higher cost to the consumers.

Based on this I still like firms like the Bedrock quarries that have either pricing power(steel), or firms that benefit from inflation(energy). I do hope that America's favorite family can keep their heads above water, and I do hope all turns out well for Dino.....

Hey but Fred just got 1200 shiny new clams (clams are the currency in Bedrock right?) so crises over right? Hey, don't worry there Fred, got some new money, there is no recession. Spend away!

Nice write up bellard. Very entertaining (and educational). Most people don't get the severity of how badly they are mishandling their finances. I also agree that most people don't get the magnitude of how much less their money is going to be worth in the future.

Hi bellard, nice writeup, funny and very creative. Wait til the boys at the Loyal Order of Water Buffalos Lodge find out about Fred's inability to pay his annual membership fees -- it's not gonna be pretty!

I have a "4-F's Rule", though sometimes it's a "3-F's Rule", depending upon how I feel. It goes like this: Investing in Food, Fun or Fashion is likely to get you F--, um, Fouled." Bellard, I completley concur with your observations and think all of these industries will suffer as we make our way through the muck that is to be the 2008-2001 Recession. Perhaps it's time to short some of the clothing retailers, restaurants, pricier resorts, cruise lines and the like...

Don't forget about pebbles and bam bam. Think about the everyday expenses kids bring into the picture. I started a fund for my kids and use some (1/2) of the b-day money from grandpa and grandma madcow to invest for the kiddies. It most likely will not take care of college when the time comes, but it might provide some help for other events. You also missed the nice chunks thrown in for christmas and festivities, which are staples in the American lifestyle. Does anybody put money away for car expenses anymore? Those were probably eaten up in the last two months for gas increase:( Yikes. Wilma!

on the bright side, they don't need to pay 4$ for gas since you just have to run really fast with your feet sticking out the bottom of the car... hmm, now there's a technology that rivals fuel cells. THink I'll go out and rent that movie "who killed the foot-car"?

So, say good-bye to the obesity epidemic, and traffic congestion as we all switch to bikes, lowering the current GDP expenditure for medical from 20% to say 15% (2.4 trillion to 1.8 trillion$). With the extra 600 B$ the entire nation can start to pay down the debt. Voila, a solution to the crisis. So easy and yet so hard!